A little-known California law that allows consumers to protect themselves against identity theft by placing a freeze on their credit files has raised the mortgage community's hackles. Not because they don't think they have a right to guard their Ids, but because they fear the entire lending process could be shut down if the idea catches on.

With such a firewall in place, consumers must grant written authorization before a credit agency will release their files to a mortgage lender or any other potential creditor. And officials of the National Association of Mortgage Brokers say that can cause unnecessary delays in the application process. Worse, perhaps, according to Ginny Ferguson, who chair's NAMB's Credit Scoring Committee, Fannie Mae and Freddie Mac, the two mortgage giants which funnel tons of money into the market, won't underwrite applications from borrowers who have frozen their credit records because the companies are unable to gain access to the files without direct authorization.

"This is a bad one," Ferguson said at NAMB's annual convention in Baltimore earlier this month. "It will stop the industry dead in its tracks." Former NAMB President Neill Fendly agreed. "This is going to keep people from getting any type of credit, even credit for a cell phone," the Scottsdale, Ariz., broker warned.

Only 1,000 or so California residents have placed a hold on the credit information since the law took effect on Jan 1. But the worry is that many more will do so, and that this method of protecting one's credit identity will be adopted elsewhere.

According to NAMB, Texas is currently the only other state considering such legislation. The only reason more Californians haven't opted to place a freeze on their records is they don't realize they can, said Fendly, who is now chairman of NAMB's Government Affairs Committee.

"They're not even aware they can do it," he said. "But when word gets out, they will move quickly." Ferguson said about 50 Californians have acted to remove the roadblock from their credit files after they've run into problems securing loans. But, she added, "the process isn't easy."

"They have to opt-in to unfreeze their records with another written authorization," said the co-owner of Heritage Valley Mortgage, Pleasanton, Calif. "That can take 35-45 days, and that's only if they can remember their PIN number."

Stephanie Shaw, Director of Regulatory and Legislative Affairs, said her fear is that other states will adopt similar legislation without realizing the damage it can cause.

"Identity theft is a very sexy topic; who wouldn't want to stop it," she said. "But while they think they are doing good, they can cause great harm." Shaw said states would better serve their constituents by allowing them to place some type of security alert in their files that would require lenders to double check their identities so their credit information cannot be stolen.

Such an alert, she said, would serve as a "stop sign that tells lenders to make sure ‘I'm the one'."

Published: June 25, 2003

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